UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 3)
ELECTRO SCIENTIFIC INDUSTRIES INC. (ESIO)
(Name of Issuer)
Common Stock
(Title of Class of Securities)
285229100
(CUSIP Number)
David Nierenberg
The D3 Family Funds
19605 NE 8th Street
Camas, WA 98607
(360) 604-8600
With a copy to:
Henry Lesser, Esq.
DLA Piper Rudnick Gray Cary US LLP
2000 University Avenue
East Palo Alto, CA 94303
(650) 833-2000
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
October 24, 2006
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D and is filing this
schedule because of ss.ss. 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the
following box |_|.
--------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
The D3 Family Fund, L.P.
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) |X|
(b) |_|
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e) |_|
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Washington
--------------------------------------------------------------------------------
7 SOLE VOTING POWER
479,941 Common shares (1.6%)
-----------------------------------------------------------------
NUMBER OF 8 SHARED VOTING POWER
SHARES
BENEFICIALLY 0
OWNED BY -----------------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING
PERSON 479,941
WITH -----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 479,941; for all reporting
persons as a group, 2,741,384 shares (9.4%)
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* |_|
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.4%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
--------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
2
--------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
The DIII Offshore Fund, L.P.
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) |X|
(b) |_|
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e) |_|
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Bahamas
--------------------------------------------------------------------------------
7 SOLE VOTING POWER
633,275 common shares (2.2%)
-----------------------------------------------------------------
NUMBER OF 8 SHARED VOTING POWER
SHARES
BENEFICIALLY 0
OWNED BY -----------------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING
PERSON 633,275
WITH -----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 633,275; for all reporting
persons as a group, 2,741,384 shares (9.4%)
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* |_|
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.4%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
--------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
3
--------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
The D3 Family Bulldog Fund, L.P.
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) |X|
(b) |_|
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e) |_|
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Washington
--------------------------------------------------------------------------------
7 SOLE VOTING POWER
1,628,168 common shares (5.6%)
-----------------------------------------------------------------
NUMBER OF 8 SHARED VOTING POWER
SHARES
BENEFICIALLY 0
OWNED BY -----------------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING
PERSON 1,628,168
WITH -----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
0
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 1,628,168; for all reporting
persons as a group, 2,741,384 shares (9.4%)
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* |_|
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.4%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
--------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
4
--------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
Nierenberg Investment Management Company, Inc.
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) |X|
(b) |_|
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e) |_|
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Washington
--------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
-----------------------------------------------------------------
NUMBER OF 8 SHARED VOTING POWER
SHARES
BENEFICIALLY 2,741,384 shares (9.4%)
OWNED BY -----------------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING
PERSON 0
WITH -----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
2,741,384 shares
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 2,741,384; for all reporting
persons as a group, 2,741,384 shares (9.4%)
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* |_|
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.4%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
--------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
5
--------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON
Nierenberg Investment Management Offshore, Inc.
--------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) |X|
(b) |_|
--------------------------------------------------------------------------------
3 SEC USE ONLY
--------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
--------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e) |_|
--------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Bahamas
--------------------------------------------------------------------------------
7 SOLE VOTING POWER
0
-----------------------------------------------------------------
NUMBER OF 8 SHARED VOTING POWER
SHARES
BENEFICIALLY 633,275 common shares (2.2%)
OWNED BY -----------------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING
PERSON 0
WITH -----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
633,275 common shares
--------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
For the reporting person listed on this page, 633,275; for all reporting
persons as a group, 2,741,384 shares (9.4%)
--------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* |_|
--------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.4%
--------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
--------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
6
This Amendment No. 3 to Schedule 13D (this "Amendment") amends the
below-indicated items from the Schedule 13D previously filed by or on behalf of
the undersigned parties (the "Reporting Persons") (the "Schedule 13D"), by
supplementing such Items with the information below:
Item 4. Purpose of Transaction
The reporting persons have acquired additional shares of ESIO for Investment
since the prior amendment to their Schedule 13D. See Item 5.
The reporting persons acquired the shares because we continue to believe that
there is a substantial gap between ESIO's current market value and its intrinsic
value. We believe this valuation gap persists even though the company has fine
management, a fine board, a sound business strategy, leading market shares in
its major business units, an attractive long term growth rate, and a fortress
balance sheet.
In a friendly and constructive spirit, we have recently shared several ideas
with the company in the hope that these ideas might, over time, help close the
gap between ESIO's market and intrinsic value. This dialogue occurred in two
conversations, summarized below, subsequent to ESIO's annual shareholder meeting
of October 5, one with the Chairman of the Board of Directors and the other with
the CEO, CFO, and the company's Director of Corporate Development and Investor
Relations.
In our conversation with the Chairman, we noted that, according to ESIO's most
recent proxy statement, none of the company's outside directors owned outright
any shares of the company's stock. We also expressed our belief that the
financial community appears to attribute little value to ESIO's approximately
$7.50 per share in cash when valuing the company. Finally, we noted how
challenging it is for the company to earn a mid teen's return on equity (which
we consider achievable) when half the company's equity sits on its balance sheet
in cash and marketable securities which earn only a 5% pre-tax return.
We suggested to the Chairman that the ESIO board consider mandating that each
outside director ultimately, over a period of time, hold a significant personal
investment in the company's shares, which could be purchased in the open market
or earned through board service in lieu of cash fees. We believe large director
shareholding could more closely align the interests of the company's directors
and shareholders and perhaps heighten urgency about driving ESIO to attain a
mid-teens return on equity. We believe that doing this could help close the gap
between ESIO's market and intrinsic value.
Our separate conversation with the CEO, CFO and Director of Corporate
Development and Investor Relations pertained to several other investors'
apparent disappointment with ESIO's recently reported quarterly results. During
the company's earnings conference call, several investors expressed surprise and
displeasure with the company's revenue guidance, both relative to their
expectations and to the company's prospective shipments. This negative reaction
was unfortunate because it appears to us that ESIO's several years of investing
heavily in Research & Development is beginning to pay off in new products,
increased customer penetration, market share gains, improved revenue growth, and
widening margins.
7
The purpose of our conversation, however, was to suggest to management that the
shareholders' disappointment with the company's revenue guidance was neither
unreasonable nor unforeseeable. After all, investors have two fundamental
preferences: they prefer linear growth over lumpy growth and they hate
surprises.
Legitimate investor expectations about linear revenue growth create a challenge
for ESIO for three reasons: (1) many ESIO products carry seven figure price
tags, which means that small variations in the number of units shipped in a
quarter can drive significant near term revenue fluctuations; (2) ESIO sells to
a highly concentrated set of customers, which means that small near term
variations in ordering by a single customer can drive significant near term
revenue fluctuations; and (3) ESIO is introducing many big ticket new products
which customers will test thoroughly before accepting and paying for the
products.
Therefore we advised ESIO management that they should bend over backwards to
remind investors that these innocent factors can cause meaningless near term
fluctuations in sequential revenue growth while the company can nevertheless
remain on a healthy 15% + long term growth trajectory. In addition, we suggested
that ESIO management consider guiding and characterizing financial results less
by individual quarter and more in terms of multi-quarter moving averages which
could help smooth over insignificant near term fluctuations. Our belief is that
such proactive investor communication could avoid the disappointment which
occurred in the most recent earnings call.
In conclusion, we believe that the combination of more proactive communications
with the investment community and increased director ownership of ESIO stock
could ultimately drive ESIO's share price closer to the company's intrinsic
value.
The previous statements by the Reporting Persons as to their views regarding
this investment represent solely their own analyses and judgments, based on
publicly-available information and their own internal evaluation thereof. Those
statements are not intended, and should not be relied on, as investment advice
to any other investor or prospective investor. To the extent those statements
reflect assessments of possible future developments, those assessments are
inherently subject to the uncertainties associated with all assessments of
future events; actual developments may materially differ as a result of
circumstances affecting ESIO and/or extrinsic factors such as developments in
the company's industry and the economic environment. The Reporting Persons
reserve the right to change their internal evaluation of this investment in the
future , as well as to increase or decrease their investment depending on their
evaluation, without further amending their Schedule 13D except as required by
applicable rules.
Item 5. Interest in Securities of the Issuer
(a, b) The Reporting Persons, in the aggregate, beneficially own 2,741,384
common shares, constituting approximately 9.4% of the outstanding shares.
(c) During the past sixty (60) days the following purchases of Shares were
made by D3 Family Funds in open market transactions:
8
Fund Transaction Date Shares Bought Price
---- ---------------- ------------- -----
D3 Bulldog Fund LP 9/29/2006 8,700 20.19
D3 Bulldog Fund LP 10/2/2006 50,600 20.24
D3 Bulldog Fund LP 10/3/2006 9,300 20.00
D3 Bulldog Fund LP 10/4/2006 2,000 20.11
D3 Bulldog Fund LP 10/18/2006 5,200 20.22
D3 Bulldog Fund LP 10/19/2006 3,820 20.30
D3 Bulldog Fund LP 10/24/2006 18,500 19.81
D3 Family Fund LP 9/29/2006 8,000 20.19
D3 Family Fund LP 10/2/2006 35,500 20.24
D3 Family Fund LP 10/18/2006 5,500 20.22
D3 Family Fund LP 10/19/2006 1,200 20.30
D3 Family Fund LP 10/24/2006 5,500 19.81
DIII Offshore Fund LP 10/2/2006 13,300 20.24
DIII Offshore Fund LP 10/3/2006 2,000 20.00
DIII Offshore Fund LP 10/4/2006 1,600 20.11
DIII Offshore Fund LP 10/18/2006 2,665 20.22
DIII Offshore Fund LP 10/19/2006 1,480 20.30
DIII Offshore Fund LP 10/24/2006 7,035 19.81
9
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, each of the
undersigned certifies that the information set forth in the Statement is true,
complete and correct.
D3 Family Fund, L.P., and D3 Bulldog
Fund, L.P.
By: Nierenberg Investment Management
Company, Inc.
Its: General Partner
October 26, 2006 By: /s/ David Nierenberg
-------------------- ---------------------------------
David Nierenberg, President
DIII Offshore Fund, L.P.
By: Nierenberg Investment Management
Offshore, Inc.
Its: General Partner
October 26, 2006 By: /s/ David Nierenberg
-------------------- ---------------------------------
David Nierenberg, President
Nierenberg Investment Management
Company, Inc.
October 26, 2006 By: /s/ David Nierenberg
-------------------- ---------------------------------
David Nierenberg, President
Nierenberg Investment Management
Offshore, Inc.
October 26, 2006 By: /s/ David Nierenberg
-------------------- ---------------------------------
David Nierenberg, President
10